Explanations of items in the income statement

5.  Sales/segment reporting

According to IFRS 8, the identification of operating segments to be included in the reporting process is based on the so-called management approach. External reporting should therefore be based on the Group’s internal organization and management structure, as well as internal financial reporting to the Chief Operating Decision Maker. In the United Internet Group, the Management Board is responsible for assessing and controlling the success of the various segments.

The Group’s operating business is divided into the two business divisions “Access” and “Applications”, which in turn are divided into the reporting segments “Consumer Access” and “Business Access”, as well as “Consumer Applications” and “Business Applications”.

A description of the products and services is provided in Note 2.1 in the explanation of revenue recognition. The segment “Corporate” comprises mainly management holding functions.

The Management Board of United Internet AG mainly controls operations on the basis of key performance figures. It measures segment success primarily on the basis of sales revenue, and earnings before interest, taxes, depreciation and amortization (EBITDA). Transactions between segments are charged at market prices. Information on sales revenue is allocated to the country in which the company is domiciled. Segment earnings are reconciled with the total amount for the United Internet Group.

In the course of preparing the Interim Financial Statements as of March 31, 2023, the Management Board decided to make a significant adjustment to its internal reporting system. As a consequence, this change also led to a revision of segment reporting with a shift in focus from the previous “controlling view” to the “accounting view”. This decision was intended to strengthen the harmonization of the Company’s internal controlling and external reporting. The change resulted in reconciliation effects/shifts in key sales and earnings figures among the segments.

• Reconciliation effects on sales: certain intercompany sales are no longer consolidated at segment level (as previously in the controlling view), but only at Group level (accounting view).
• Reconciliation effects on EBITDA and EBIT: depreciation allocations and profit margins for intercompany services are no longer “netted” between segments (as was previously the case for internal service charging in the controlling view) but are disclosed (accounting view) – as if “booked” at segment level.

Overall, the change has no effect on the Group’s sales and earnings figures.

By making this change at segment level, United Internet is also taking account of the increasing independence of its segments (subgroups) and aligning segment reporting with the reporting of its listed and thus also reportable subgroups 1&1 AG (Consumer Access segment) and IONOS Group SE (Business Applications segment).

Segment reporting of United Internet AG in fiscal year 2023 was as follows:

In order to aid comparability with the fiscal year 2023, segment reporting of United Internet AG for the fiscal year 2022 is presented below using the accounting view:

Non-current segment assets comprise shares in associated companies, other financial assets, and goodwill.

In the fiscal year 2023, revenue of the Consumer Access segment from contracts with customers includes hardware sales of € 838,444 k (prior year: € 767,600k). Revenue of the Business Access segment from contracts with customers for the fiscal year 2023 includes hardware sales of € 16,364 k (prior year: € 7,625k). The remaining revenue of the two segments is attributable to service revenue. The other business segments only generate revenue from services.

In the reporting periods, there was no significant concentration of individual customers in the customer profile. As in the previous year, the United Internet Group did not generate more than 10% of total external sales revenue with any single customer. Foreign sales accounted for 10.6% (prior year: 10.6%) of total Group revenue.

In addition to investments, the highest management committee only monitors shares in associated companies, other non-current financial assets, and goodwill. The depreciation disclosed in the segments refers to other, non-monitored intangible assets, and property, plant and equipment, as these are largely determined automatically once the relevant useful life has been determined.

Contract balances developed as follows in the fiscal year 2023:

Apart from customer growth, the main reason for the year-on-year increase in contract assets was the increased subsidizing of hardware in the fiscal year 2023.

In fiscal year 2023, revenue of € 157,093 k (prior year: € 157,886 k ) was recognized which was contained in contract liabilities at the beginning of the fiscal year.

The total transaction price of performance obligations still unfulfilled at the end of the reporting period amounted to € 1,915,122 k (prior year: € 1,670,738 k ) as of December 31, 2023. The following table shows the time bands in which the transaction prices from unfulfilled or partially unfulfilled performance obligations as of the reporting date are expected to be recognized:

The transaction prices shown relate to unfulfilled performance obligations from contracts with customers with an original contract term of more than 12 months. They relate to service components with period-based revenue recognition and to contracts for which a one-off fee has been invoiced and which are now recognized as revenue over the relevant original minimum contract term.

6.  Cost of sales

Cost of sales in relation to sales revenue increased to 66.7% compared with the previous year (prior year: 66.0%), resulting in a decline in gross margin to 33.3% (prior year: 34.0%).

The increase in the cost of sales reflects higher hardware usage and higher depreciation from the 5G segment. For further details, please refer to Note 11.

The other cost of sales mainly include operating costs for the data centers and logistics expenses.

7.  Selling expenses

At 15.2% (previous year: 15.3%), selling expenses as a proportion of sales fell slightly. Other selling expenses mostly comprise customer relationship costs and product management expenses.

8.  General and administrative expenses

The other general and administrative expenses mostly comprise expenses in connection with accounts receivable management, third-party services, insurance contributions, and auditing fees.

9.  Other operating income/expenses

9.1  Other operating expenses

Expenses from foreign currency translation mainly comprise losses from exchange rate changes between the date of origination and time of payment of foreign currency receivables and payables as well as losses from measurement as of the reporting date. Currency gains from these items are reported under other operating income. A net consideration of this item results in a net expense of € 707 k (prior year: net expense of € 242k). The increase in other items mainly relates to expenses for the IPO of IONOS Group SE during the reporting period.

9.2  Other operating income

Income from foreign currency translation mainly comprises gains from exchange rate changes between the date of origination and time of payment of foreign currency receivables and payables, as well as gains from measurement as of the reporting date. Currency losses from these items are reported under other operating expenses. Income from derivatives in the previous year related to a hedging transaction.

10.  Impairment of receivables and contract assets

Impairment of receivables and contract assets comprised the following:

The main drivers of the increase in impairment are higher payment default rates and the increased cut-off limits for defaulting customers under the revised German Telecommunications Act.

11.  Depreciation, amortization , and impairment

Depreciation, amortization, and impairment of intangible assets, and property, plant and equipment consist of the following:

Depreciation and amortization also includes the amortization of capitalized assets resulting from business combinations. These are divided between the capitalized assets as follows:

Intangible assets with indefinite useful lives were subjected to an impairment test on the level of the cash-generating units as of the reporting date.

Amortization of capitalized assets resulting from business combinations is divided between the business combinations as follows:

12.  Personnel expenses

Personnel expenses are divided among the various divisions as follows:

Personnel expenses include wages and salaries of € 647,320 k (prior year: € 576,253 k ), and social security costs of € 112,658 k (prior year: € 99,295 k ). The rise in personnel expenses is due to the increase in headcount as well as higher salary adjustments. Personnel expenses in connection with employee stock ownership plans totaled € 8,176 k (prior year: € 11,276k).

The number of employees increased by 4.7%, from 10,474 employees in the previous year to 10,962 employees at year-end:

The average number of employees in fiscal year 2023 amounted to 10,717 (prior year: 10,231), of which 8,755 (prior year: 8,356) were employed in Germany and 1,962 abroad (prior year: 1,875).

With regard to company pension plans, the Group only has defined contribution plans. The Company pays contributions to the state pension fund as a result of statutory obligations. There are no other benefit obligations for the Company after payment of the contributions. The current contribution payments are disclosed as an expense in the respective year. In fiscal year 2023, they totaled € 45,150 k (prior year: € 41,623 k ) and mostly concerned contributions paid to the state pension fund in Germany.

As a result of contribution exemptions, an amount of € 0k (prior year: € 0k) of this total referred to contributions paid to related parties.

13.  Financial expenses

The subsequent valuation of embedded derivatives relates to the measurement through profit or loss of the derivatives agreed in the course of the Warburg Pincus investment in the Business Applications segment, whose valuation depends in particular on the enterprise value of IONOS Group SE. Expenses from subsequent valuation mainly relate to the decline in the fair value of these derivatives as at the end of the reporting period. The sharp decline in derivatives results from the decline in the valuation of the IONOS Group, which was based on its stock market price. This valuation is below the previously recognized enterprise value, which was determined on the basis of valuation reports.

The interest expense from the deferral of spectrum liabilities results from the agreement with the Federal Ministry of Transport and Digital Network Infrastructure under which the payment obligation for mobile communications spectrum was extended to 2030. Please refer to Note 34,3 for further details.

Please refer to Note 45 for an explanation of the financial expense from leases.

14.  Financial income

The subsequent valuation of embedded derivatives refers to the measurement through profit or loss of derivatives agreed in the course of the Warburg Pincus investment in the Business Applications segment. Income from subsequent valuation mainly relates to the decrease in the conditional purchase price liabilities from Strato. For further information, please refer to Note 34.1.

Other financial income mainly comprises interest income from credit balances with banks. With regard to income from loans to associated companies, please refer to Note 41 .

15.  Income taxes

The income tax expense is comprised as follows:

Under German tax law, income taxes comprise corporate income tax and trade tax, as well as the solidarity surcharge.

The effective trade tax rate depends on the municipalities in which the Group operates. The average trade tax rate in fiscal year 2023 amounted to approx. 15.60% (prior year: 15.64%).

As in the previous year, German corporate income tax was levied at 15% – irrespective of whether the result was retained or distributed. In addition, a solidarity surcharge of 5.5% is imposed on the assessed corporate income tax.

In addition to taxes on the current result, current income taxes include non-period tax expenses of € 4,579k (prior year: tax income of € 4,824k).

Deferred tax assets are recognized for tax loss carryforwards, interest carryforwards, and temporary differences if it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

Deferred tax assets for tax loss carryforwards in certain countries are shown in the table below:

Deferred taxes for loss carryforwards mainly relate to the 1&1 Versatel Group. Taking into consideration significant taxable temporary differences, the realization of loss carryforwards is based in particular on the strategic importance of Versatel as an i ntercompany service provider for the existing Layer II products of 1&1 Telecom GmbH, as well as on significant positive earnings forecasts and the planned provision of the backbone network for the establishment of the 5G mobile communications network of 1&1 AG.

The following time limits apply for the use of tax loss carryforwards in different countries:

• USA: 20 years for loss carryforwards incurred before 2018, indefinite for loss carryforwards incurred from 2018 onwards
• Germany: Indefinite, but minimum taxation

Tax loss carryforwards for which no deferred tax assets have been formed, refer to the following countries (excluding Germany):

* Tax rate 21.0%

** Tax rate 10.0%

A breakdown of income tax types results in the following loss carryforwards for Germany for which no deferred taxes have been formed:

Loss carryforwards in Germany for which no deferred tax assets have been formed mainly refer to loss carryforwards of 1&1 Versatel GmbH, 1&1 Energy GmbH, and IONOS Group SE (formerly: IONOS TopCo SE).

The so-called “interest cap” enshrined in German tax law limits the deductibility of interest expenses for the assessment of company income taxes. Interest expenses that cannot therefore be deducted are carried forward indefinitely to the following fiscal years (interest carryforward).

The Group’s interest carryforward, for which no deferred taxes were formed, amounts to € 0 k (prior year: € 89,648 k ).

In the reporting period, additional deferred tax assets were recognized on interest carryforwards due to the positive planning of tax results. The resulting tax relief amounted to € 30,697 k in the financial period (prior year: € 16,150 k ). Deferred tax receivables on interest carryforwards from previous years account for € 24,320 k of this total.

In fiscal year 2023, no interest and loss carryforwards were used (prior year: € 0k) for which deferred taxes had been formed in the previous year.

Deferred taxes resulted from the following items:

* In the fiscal year 2022, adjustments for consolidation were allocated to the individual balance sheet items from which the relevant deferred taxes are derived.

The net balance of deferred tax liabilities of € 253,383 k in the previous year decreased to a net balance of deferred tax liabilities of € 225,928 k . As a result, the total change in the net balance of deferred taxes amounted to € 27,455 k (prior year: € 13,288 k ). This change was mainly due to the following factors:

• Decrease in deferred tax assets from employee stock ownership plans of € 14.9 m
• Decrease in deferred tax liabilities from intangible assets in connection with the amortization of assets from company acquisitions of € 13.5 m
• Increase in deferred tax assets from interest carryforwards of € 30.7 m

The change in the net balance of deferred taxes compared to the previous year is reconciled as follows:

The deferred tax effects recognized in equity result mainly from the employee stock ownership plans, which are recognized in equity.

The aggregate tax rate is reconciled to the effective tax rate of continued operations as follows:

The item “Actual and deferred taxes for previous years” mainly refers to actual tax expenses from the tax audit.

The item “Tax-reduced profit from disposals and income from investments” relates to income resulting from the IPO of IONOS Group SE.

The item “Tax effects in connection with internal Group dividends and disposals” relates to relates to a receivable from affiliated companies in the Business Access segment that was written down in previous years and reversed in the fiscal year 2023.

The item “Non-taxable at-equity results” mainly relates to the prorated results of the associated companies Kublai GmbH and AWIN AG.

The anticipated tax rate corresponds to the tax rate of the parent company, United Internet AG.

In accordance with the amendment to IAS 12 International Tax Reform - Pillar Two Model Rules, the United Internet Group applies the temporary, mandatory exemption from the recognition of deferred taxes resulting from the introduction of global minimum taxation.

Of the jurisdictions to be included for Pillar Two purposes, the following have already enacted final implementing legislation: Germany, France, Austria, Romania, and the UK. The following jurisdictions have already published draft legislation for corresponding implementation: Canada and Spain.

The comprehensive analysis based on the qualified CbCR data of the current and the three previous fiscal years as well as the forecasts for future fiscal years shows that Romania could qualify as a low-tax country for Pillar Two purposes within the United Internet Group once the legislation comes into force. This could result in an annual additional tax burden in the lower five-digit euro range for the Group as a whole from fiscal year 2024 onwards.

As in the previous year, income tax claims mainly relate to receivables from tax authorities in Germany and amounted to € 34,754 k (prior year: € 34,741 k ) as of the balance sheet date.

As in the previous year, income tax liabilities relate primarily to liabilities to tax authorities in Germany and amounted to € 87,996 k (prior year: € 52,723 k ) as of the balance sheet date.

16.  Earnings per share

As of December 31, 2023, capital stock was divided into 192,000,000 registered no-par shares (prior year: 194,000,000 shares) each with a theoretical share in the capital stock of € 1. On December 31, 2023, United Internet held 19,183,705 treasury shares (prior year: 7,284,109). These treasury shares do not entitle the Company to any rights or proportional dividends and are thus deducted from equity. The weighted average number of shares outstanding used for calculating undiluted earnings per share was 172,816,295 for fiscal year 2023 (prior year: 186,715,891).

As of the reporting date, there was a dilutive effect from employee stock ownership plans of subsidiaries of € 0.02 (prior year: € 0.01) per share.

The calculation of the dilutive effect from conversion is made by first determining the number of potential shares. On the basis of the average fair value of the shares, the number of shares is then calculated which could be acquired from the total amount of payments (par value of the rights plus additional payment). If the difference between the two values is zero, the total payment is exactly equivalent to the fair value of the potential shares and no dilutive effect need be considered. If the difference is positive, it is assumed that these shares will be issued in the amount of the difference without consideration.

Based on an average market price of € 17.77 (prior year: € 26.44), this would result in the issuance of 2,585,413 shares (prior year: 461 ,921) without consideration. The number of shares used to calculate diluted earnings per share for the fiscal year 2023 is therefore 175,401,708 (prior year: 187,177,812).

The following table shows the underlying amounts for the calculation of undiluted and diluted earnings:

17.  Dividend per share

The ordinary Annual Shareholders' Meeting of United Internet AG on May 17, 2023 voted to accept the proposal of the Management Board and Supervisory Board to pay a dividend of € 0.50 per share. The total dividend payment of € 86.4 m was made on May 22, 2023.

In accordance with section 21 of the Company’s articles, the Annual Shareholders' Meeting decides on the allocation of unappropriated profit. For the fiscal year 2023, the Management Board will propose to the Supervisory Board a dividend of € 0.50 for each share entitled to dividends for the past fiscal year 2023.

The Management Board and Supervisory Board will discuss this dividend proposal at the Supervisory Board meeting on March 20, 2024.

Pursuant to section 71b AktG, the Company does not accrue any rights from treasury shares and thus has no pro-rated dividend rights. As at the date of signing the Consolidated Financial Statements, the United Internet Group holds 19,183,705 treasury shares (prior year: 19,183,705). The number of shares with dividend rights may change before the Annual Shareholders' Meeting. In this case, a proposal will be made to the Annual Shareholders' Meeting to maintain the dividend of € 0.50 per entitled no-par value share with a corresponding adjustment to the proposal for the appropriation of profit.